On Thursday, I met three sharp hedge fund managers based in Montreal: Jacques Lacroix and Paul Beattie of BT Global Growth and Brian Ostroff of Winderemere Capital.
Their offices are all next to each other. I first met with Jacques and
Paul and chatted a little with Brian before heading off to lunch with
My meeting with Jacques and Paul was extremely interesting.
I've met many managers in my career and you can always tell which ones
have substance and brains as opposed to the ones that are slick
marketing types. The two met at Telesystem International Wireless (TIW),
a company founded by Quebec entrepreneur Charles Sirois. Jacques was
among the first hires there and Paul followed soon after.
men made more money on TIW stock towards the end when it was trading for
pennies and they scooped it up than while working at TIW (Paul told me
he dumped some shares at $55 and bought back a boatload at 33 cents when
institutions dumped and the company's enterprise value was $4). Paul
worked in private equity briefly after TIW before teaming up with
Jacques to form BT Global Growth. They manage roughly $25 million, have
their liquid assets in the fund, and their clients are mostly former
senior managers they worked with at TIW. Paul told me flat out: "we want
smart clients who we can interact with and learn from."
managers have extensive global finance experience and it shows in the
way they invest. Paul told me straight out: "We're finance guys and
invest based on cash flows. We don't like highly levered companies."
Indeed, they can look at any balance sheet and understand the potential
of any company as well as the pitfalls. Their global finance experience
serves them well. Paul has traveled to India and China countless times
as well as other parts of Asia, and he's a big believer in the secular
shift towards that part of the world. "We're going to have huge problems
in the future competing with Asia."
Importantly, he doesn't buy the "China is imploding" scenario that Jim Chanos is warning of.
"If you think the price of oil is high now, just wait, it's going
much, much higher. 30% of our portfolio is in oil and oil services
companies. Don't like natural gas as there are storage problems, but oil
is definitely heading higher and anyone who doesn't see it is going to
I stopped him there and asked him "if China
continues to do well, then that's bullish for Canada?" He responded:
"It's good for Vancouver real estate prices and generally good for the
Canadian economy." However, Paul sees inflation rising and told me rates
are heading higher: "You saw the latest Canadian CPI numbers?
Consumer prices rose 3.7% over the past year." I told him if rates go
higher, a lot of Canadians are in big trouble as they're carrying way
too much debt, especially on their houses. He replied: "That's why the Bank of Canada has been talking up rates so that people are prepared for the inevitable."
On their investment process, Jacques told me that they actively trade
their short book, mostly have core holdings in their long book and every
year since they started managing money they have hit home runs with
many of their stock picks. Their latest audited financial statements are available on their site,
and I saw the performance figures. Since inception (Oct. 2006), the
Fund has returned 17%. They got hit in 2008, down 26% but came back
strongly in 2009, rising 64% (using no leverage!).
2008 crisis was a wake-up call for both managers. Paul and Jacques told
me the Fund was down 11% in September 2008 and that's when they sat
together and said they have to manage their short book better to limit
downside risk and minimize volatility. Again, keep in mind, they use no leverage whatsoever in their fund.
But because some of their core holdings are tied with the China theme
(they invest almost exclusively in Canadian stocks), they have suffered
some bad months (Paul told me the Fund had a bad June as one of their
core holdings was accused of being a Chinese fraud; he doesn't see it).
Some of their holdings are illiquid and volatile (they didn't provide me
with standard deviation figures, but saw vol has come down considerably
in last 18 months).
However, Paul told me that liquidity is not a problem as he can "convert
the entire portfolio into cash in less than a week." They showed me
their top 7 holdings: Domtar, International Paper, Gammon Gold, Garda
World HY Bonds, Megabrand HY Bonds, Pacific Rubiales and Ressources
d'Arianne. I found their two top holdings very interesting because some
top funds bought paper companies over the last year, including the
Caisse , Dodge & Cox, and Paulson & Co (go back to read my last comment on spying on elite funds). Just look at the top institutional holders of Domtar, which has soared over the past two years (click on image to enlarge):
short side, Paul told me he's short Canadian money managers. "A lot of
them are managing way too much money and their performance is lagging.
Their business model requires more and more assets, which they gather
through paying brokers fees, but this approach has run its course. Look
at some of the largest funds in Canada (I'll be kind and omit their
names), managing billions and some of the larger players have performed
terribly over the last five years but their assets keep growing because
institutions find refuge in brand names and brokers get nice fees. Even
guys like Eric Sprott who I admire a lot are now managing $10 billion
and given his approach, he is the market in many illiquid names. His
performance has suffered lately and it will be hard for him to recover
given his size." (must admit, I was floored when I heard Sprott is now
managing $10 billion. 2% management fees on $10 billion pays a lot of
hefty salaries and an army of salespeople focusing on gathering ever more
assets and doesn't incentivize him or his managers to collect
performance fees. At one point, you're just an asset gatherer).
has strong views on raising assets. "I think we'll cap the Fund at
roughly $200 million. We're not in the asset gathering business and
prefer focusing exclusively on performance." I told him the terms of his
Fund, publicly available on their site,
are quite impressive with a high water mark, a 5% hurdle rate, but also
asked him about the $150,000 CAD minimum investment. I told him "it
looks like you're desperate raising assets." He told me "not at all,
we're just not willing to give any equity stake away to anyone. We got
some of the smartest investors in the country but the truth is it's hard
to raise institutional money even if you have an exceptional audited
track record that goes back several years."
Paul gave me examples of top Canadian funds that have not raised a dime
of institutional money even though they have the best long-term track
record. Both Paul and Jacques are very open to local money from high net
worth individuals and institutions. "We treat all our investors with
respect and work hard to deliver on our objectives." I did get the
sense, however, that Paul was a little frustrated with the Quebec absolute return fund.
"Look, we remain hopeful, met the guys from HR Strategies, they're
smart, but the truth is what you wrote, namely that the bulk of money
has been funneled to the largest funds, and most of them don't really
need it." I told him flat out: "That's Quebec's finance community, one
big club where they scratch each other's back" (not that it's any
Anyways, towards the end of our meeting, we started talking about their
core mining holdings. They like phosphate and zinc and told me they have
big stakes in Ressources d'Arianne (DAN.V),
a small Quebec mining company that holds interest in the Lac à Paul
project, a phosphorus and titanium deposit, and Focus Metal (FMS.V),
which explores for flake graphite, rare earth elements, and precious
and base metals. In terms of a pure zinc play, Jacques wrote me that
Full Metal Minerals (FMM.V) announced the spinout of Full Metal Zinc which should start trading in the next few weeks.
I wanted to know more on phosphate. Paul introduced me to Brian Ostroff of Windermere Capital,
another extremely sharp manager with years of experience. Brian knows
his stuff on mining stocks. He told me that his fund is a an excellent
diversifier in an overall portfolio but too volatile when looked at on a
standalone basis. He and his investors own almost 20% of Ressources
d'Arianne and firmly believes in their Canada Phosphate potential.
"My only concern is that management is going to find growth challenges
ahead that they're not prepared to deal with right now which is why I'm
actively involved on finding competent board of directors."
entire discussion with Brian was just as fascinating as my previous one
with Jacques and Paul. He told me to read an article on phosphate
independence which was published in The Energy Report (click here to download article) and inform myself on the importance of phosphate for fertilizer. He told me the two biggest producers are Agrium (AGU) and Mosaic (MOS).
He told me that Mosaic is currently in court fighting to keep a plant
in Florida open -- one that produces close to 18% of Mosaic's total
phosphate production. "If that plant shuts down, fertilizer prices will
shoot through the roof." As far as which countries have huge phosphate
deposits, he told me that Morocco has the biggest deposits in the world
but given its political climate, companies are looking elsewhere. That's
where Canada comes into the picture.
Brian also told me that
resource stocks will be the next big thing. He agrees with Paul on China
and emerging markets, and told me that gold shares bottomed six months
before the market bottomed in March 2009. "Precious metals and
commodities were in vogue in the 70s and 80s, then came tech in the 90s,
then financial paper in the last ten years. Now we are coming back to
I found the discussion on phosphate fascinating and the fact that we
have deposits here in Quebec bodes well for our economy. Paul told me a
lot of Quebec resource companies are small, have small capitalization,
but once "institutions wake up see the potential, these companies are
potential 10-baggers." I did some research on the phosphate fertilizer industry
and the environmental concerns, and came away a little mixed.
Nonetheless, I think that phosphate could be Canada's next Potash and
bought a speculative position in Ressources d'Arianne (nothing big, 3000
shares, and this is money I'm prepared to lose).
lunch with Paul downstairs from their offices at Sho-Dan restaurant (amazing sushi and sashimi). What struck me is his work ethic, his
integrity and his brains. All three men are extremely sharp and work
like dogs. Paul told me "in this biz, if you're not putting 80 hour
weeks, you're not going to be successful. I've met many CEOs and CFOs
right here at Shodan, and believe me, we are one one up on Toronto being here in Montreal. They don't cover Quebec's mining industry anywhere near as
well as they should. That leaves plenty of opportunities for us."
thing struck me at lunch. Paul praised his partner Jacques calling him
"a true genius," told me Brian is equally bright and "they're lucky to
have him there " and he told me that he put his father's nest egg in the
Fund at the age of 72 and "it's been his top-performing asset over the
last five years" (all of Paul and Jacques' liquid net worth are in the
Fund). He also told me his dad's brokers were trying to "dissuade him
from investing in a hedge fund" and they ran all sorts of "bullshit
stress tests with faulty assumptions to make their case." We both agreed
that many brokers are full of it and only look after their interests.
Finally, Paul told me that in his opinion, the two smartest guys in
Canada's financial industry are Tom Higgins, President and CEO of Maple Financial Group, and Ed Clark, President and CEO of TD Financial Group.
I'm glad I met Paul, Jacques and Brian. If you want to invest with BT Global Growth,
go to their website and contact them. The minimum investment is $150,000
CAD and they accept money from individuals and are looking for
institutional backing. If you want to know about a couple of more
interesting resource plays they mentioned to me, then donate $100 to my blog (under the pig at the top of my page) and I'll be glad to forward you the information.
Have a great long weekend. Happy Canada Day!